January 2nd, 2017 6:28 AM by Jackie A. Graves, President
Mortgage rates took a big leap after the presidential election
and are continuing to move higher. Demand for homes is strong, but home prices
are hitting new highs and affordability is weakening.
average buyer who was thinking about getting into a new home last summer, but
didn't, the monthly payment on that same home is now considerably higher. There
is, however, a way to lower it by buying down the rate.
your rate down, or 'paying points,' means you're paying an extra fee on top of
standard loan fees like appraisal, underwriting and a credit report to get a
lower rate," said Julian Hebron, executive vice president of sales and
marketing at RPM Mortgage.
course that means you have to have more cash upfront. The math isn't as
complicated as it seems. First, a "point" is 1 percent of the amount
of your loan, so if you are taking out a $200,000 mortgage, 1 point would be
$2,000. Lenders will lower your rate if you pay that point at closing, or, at
the start of the loan.
you were getting a 30-year fixed loan of $325,000, you might get two options
with and without points. Today the option with zero points might show the rate
as 4.25 percent, and the option with 1 percent in points — equal to $3,250 —
might show the rate as 4 percent," said Hebron. "Paying $3,250 at
closing to lower your rate by .25 percent lowers your payment $42 per month,
and lowers your interest cost $68 per month."
you know if you should buy down the mortgage? It's all about time — how long
you expect to be in the home and have that same mortgage. What is the savings?
Here comes more math — this time from Matt Weaver, vice president of sales at
Finance of America Mortgage.
can calculate this figure by taking the dollar value of the buy down and
dividing it by the monthly savings from the lower interest rate, then dividing
that figure by 12 months. So as an example, let's say our prospective homebuyer
will need to pay $2,000 in buy down to generate $30.00/month in savings. If we
divide $2,000.00/$30.00, we would conclude it would take 66.7 months, or 5.5
years, to recoup the cost of the buy down — now you can ask yourself, 'Do I
reasonably foresee myself staying in this home for at least 5.5 years?' in order
to truly capture the return on your investment," explained Weaver.
simple, if you have the cash and the time, but buying down a mortgage, as with
everything else in housing, carries some risk.
they say, 'A dollar in the present is worth more than a dollar in the future.'
The risk with the uncertainty in length of ownership coupled with the possible
need of that same cash for any unforeseen expenses poses a risk for homebuyers
considering a buy down," said Weaver. "The buy-down strategy can be worthwhile
with a longer-term view in mind, longer term being defined as seven years or
benefits can also vary lender to lender. Shopping for the best rate is always a
good plan but even more important when you're looking to buy down.
break-even time on buying down varies from lender to lender and from rate to
rate, generally in a range of five-10 years. Look at different combinations of
rates and upfront costs side-by-side and see which makes the most sense for
you," suggested Matthew Graham, chief operating officer of Mortgage News
Daily. "Heads-up: Some lenders with stricter interpretations of recent
regulatory changes no longer allow this flexibility."
really don't see yourself in the home for more than seven years, or even 10, you
might want to consider an adjustable-rate mortgage (ARM). These carry much
lower interest rates and can be fixed for five, seven, 10, even 15 years. They
were vilified during the housing crash because so many people took them out and
then couldn't afford the payments when they adjusted, but the ARMs of today are
not those of years past. Read this for more on ARMs.
more thing to consider is the rate itself. Mortgage rates are rising, but they
are still near historic lows. If you are really on the edge of homeownership,
perhaps you're a young first-time buyer, then buying down the rate is probably
not for you. The odds are you're going to want to be more mobile, and staying
in the home for seven years is longer than it sounds. Bailing out of the home
before you expected is a real risk.
other risk of buying down your rate is that rates drop after you do so,"
cautioned Hebron. "For now that risk is low. The Mortgage Bankers
Association is predicting that rates will rise about .375 percent from current
levels during 2017."
rates are expected to rise, the experts have been wrong before. Rates could
just as easily come down and credit
availability could loosen up, depending on how the new administration tackles
mortgage reform. Rates are also sensitive to global financial markets, which
are always a wild card, and especially so now.
By Diana Olick To view the original
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